Novartis india is the Indian subsidiary of Novartis AG. The company has the following business segments – Pharmaceuticals, Generics, OTC and Animal care.

The company is in various therapeutic areas such as Immunology and Transplantation, Oncology, Gynaecology, Central Nervous System, Respiratory, Pain and Inflammation, Ophthalmics and Orthopaedics. In the OTC space the company has some strong brands such as Sandoz

Financials
The company has just tread water in the last few years. The topline growth has been more or less flat and is currently at around 520 Crs. The bottom line is now at around 88 Crs. Both the topline and bottomline have growth a low single digit growth rates and I expect the same to continue.

The Global parent has a local unlisted subsidiary and has made comments of introducing products through the unlisted subsidiary. As a result the topline and bottomline growth for novartis could be at best 5-7% per annum for the next few years. The poor growth in the last few years has mainly been due to poor performance of generics, sale of the Rifampicin (anti-TB) business and due to price control on some of its brands.

Valuation
At the current profit of 88 Crs and EPS of around 27.5, the company sells for around 12-13 times PE. In addition the ROE and ROCE is actually very high. The 2006 AR shows that the company as just 10 Crs in fixed assets and negative working capital. As a result the Return on capital is very high (>100%). All the assets are in cash or inter corporate deposits and other liquid investment. It seems the company has become complete asset free and is outsourcing almost its entire production.

In addition in one of the earlier AGM, the company has mentioned that the excess profits would be returned via generous dividends. The dividends for the last few years have been 200%+ giving a dividend yield of almost 3-4%.
On a comparable valuation basis, the other pharma MNC with similar business model sell at around 20-30 times PE.

Risk
Poor topline and bottom line growth or even de-growth. In absence of few product launches in the Pharma segment and continued competition and price pressure the company could have a drop in net profits. The OTC and animal care business seem to be growing, but do not have very high margins

In addition the parent could increase the focus on the unlisted subsidiary and milk the listed one for profits.

Conclusion
The company is selling at a 4 year low. I feel that all the negatives seems to be priced in. Net of cash, the company sells at almost 8-9 times earnings or cash flow. This seems to be fairly low for a stable and profitable pharma business.

3 Comments

This company seems to have all qualiites of a value trap. A dying business generating loads of cash and appearing cheap on historical valuation. The 30x PE of comparables qouted here makes it more tempting. If the future is bleak the current multiple of this company instead of matching the multiples of the comps may actually decline.

the company could be a value trap for a variety of reasons. however i do not think it is a dying business. the OTC and animal feed units are growth units. the generics business is degrowing as the company is exiting the unprofitable lines. the pharma business even in absence of new launches has a small growth. in effect the business could grow in low single digits.if the multiples decline further, then the company will be available at cash value in 3-4 years. thats the market cap would almost equal cash on hand. in that scenario you would the parent buy out the local shareholders ..maybe at an unfair price.

your analysis of the company seems correct. i have been invested in this company for the last 2 years and it has been frustrating. also the company owns the premises at annie besant road and that is a valuable piece of real estate. some more examples of cash generating machines with similar charecteristics are solvay pharma india, merck, abbott, and wyeth. would appreciate your feedback at rajnishbery2gmail.com.